Overview

A Charitable Remainder Trust (CRT) is a split‑interest, irrevocable trust designed to accomplish two goals at once: provide an income stream to named beneficiaries (often the donor or the donor’s spouse) and, after the income period ends, transfer the remaining trust assets to one or more qualified charities. CRTs are governed by Internal Revenue Code §664 and are tax‑exempt for most trust income, allowing strategic sales of appreciated property inside the trust without immediate capital gains tax at the trust level (though special rules apply for unrelated business taxable income). See the IRS guidance on CRTs for details.

In practice, I’ve used CRTs for clients who want steady retirement income while maximizing the value of charitable gifts. A typical scenario: a client transfers highly appreciated stock or a rental property into a CRT, the trust sells the asset tax‑free, reinvests the proceeds, pays the client an income stream, and ultimately directs the remainder to chosen charities.

(Source: IRS — Charitable Remainder Trusts: https://www.irs.gov/charities-non-profits/charitable-remainder-trusts)

Key features you must know

  • Irrevocable: Once funded, a CRT generally cannot be revoked or changed in a way that redirects the charitable remainder. This makes advance planning essential.
  • Two primary structures:
  • Charitable Remainder Annuity Trust (CRAT): pays a fixed dollar amount annually (not less than 5% of initial trust value).
  • Charitable Remainder Unitrust (CRUT): pays a fixed percentage of the trust’s annually‑determined fair market value (again, not less than 5%).
  • Duration: Income can be paid for one or more lives or for a term of years not exceeding 20 years. The remainder beneficiary must be a qualifying charitable organization.
  • Minimum remainder requirement: Under IRC §664, the present value of the charitable remainder (using IRS actuarial tables and the Section 7520 rate) must be at least 10% of the initial fair market value of the assets transferred.
  • Tax status: CRTs are tax‑exempt entities under §664(c) except for unrelated business taxable income (UBTI). Trustees must file tax Form 5227 to report trust operations and compliance.

(IRS reference: https://www.irs.gov/charities-non-profits/charitable-remainder-trusts; see Form 5227 guidance at https://www.irs.gov/forms-pubs/about-form-5227)

How income and tax treatment work — the four‑tier model

Although CRTs are tax‑exempt, distributions to noncharitable beneficiaries carry tax consequences. The IRS applies an ordering rule (the four‑tier system) that characterizes each distribution as coming first from ordinary income, then capital gains, then tax‑exempt income, and finally corpus/principal. Practically, that means a distribution will usually be taxable to the beneficiary to the extent the trust has current or accumulated ordinary income first, then capital gains, etc.

This ordering affects planning: for donors who want to avoid high ordinary income in the income years, a CRUT that allocates gains differently over time may behave differently than a CRAT. Always model expected trust earnings and distribution tiers with your advisor.

(IRS — Charitable Remainder Trusts; see IRC §664 commentary.)

Why clients use CRTs — tangible benefits

  • Capital gains efficiency: Funding a CRT with appreciated property allows the trust to sell that property without immediate capital gains tax at the trust level. The tax consequence is deferred and allocated when distributions are made to noncharitable beneficiaries under the ordering rules.
  • Immediate charitable income‑tax deduction: Donors receive a present‑value charitable deduction equal to the actuarial value of the remainder interest (computed using IRS Section 7520 rates at the time of funding). This deduction is subject to the usual percentage limits and carryover rules — consult your tax advisor.
  • Income for life/term: CRTs can create lifetime income (useful in retirement) while accomplishing philanthropic goals after death.
  • Estate tax planning: Because CRT assets ultimately pass out of the donor’s estate, funding a CRT can reduce estate taxable value.

Common planning choices and tradeoffs

  • CRAT vs CRUT: Choose a CRAT if you want predictable, fixed income. Choose a CRUT if you want payments that can grow with invested principal (payments tied to annual trust value). CRUTs are generally more flexible with ongoing contributions (some CRUTs permit additional gifts; CRATs do not).
  • Asset selection: Highly appreciated, low‑basis assets (stocks, business interests, real estate) tend to produce the largest benefits when placed in a CRT because the trust can sell them without immediate capital gains tax.
  • Trustee selection: A professional or corporate trustee can reduce conflicts of interest and administrative errors. I commonly recommend co‑trusteeship (family member plus independent professional) for balance.

Real‑world examples

  • Stock transfer. A client transferred $1.5M of appreciated stock into a CRUT. The trust sold the stock, reinvested in a diversified portfolio, and began paying 5% of the trust’s annual value. The client received an immediate charitable income tax deduction for the remainder interest, avoided immediate capital gains tax on the sale, and received a lifetime income stream.

  • Real estate funding. Another client placed a rental property in a CRAT, which then leased the property back to a third party. The trust paid the fixed annuity to the income beneficiaries and, after 20 years, distributed the remainder to the designated charity.

These scenarios illustrate how CRTs convert concentrated, illiquid, or highly appreciated positions into diversified income while preserving philanthropic intent.

Pitfalls and compliance risks (what often goes wrong)

  • Violating private benefit or self‑dealing rules: Donors and related parties must avoid transactions that benefit insiders (trustees, family) at the trust’s expense. The IRS applies strict self‑dealing provisions to CRTs.
  • Underfunding the remainder: If the trust payout or investment returns are set so high that the remainder interest drops below the 10% present‑value floor, the CRT will fail the tax rules and lose tax benefits.
  • Unrelated business taxable income (UBTI): If the trust operates an active trade or business or uses debt‑financed income, it may generate UBTI and owe tax.
  • Administrative complexity: CRTs require annual reporting (Form 5227), valuation, and careful recordkeeping.

Practical checklist before creating a CRT

  1. Run an after‑tax cash‑flow model comparing a CRT to alternatives (donor‑advised fund, outright sale and gift, retained life estate).
  2. Confirm the asset’s suitability (highly appreciated, marketable, or income‑producing).
  3. Choose CRAT vs CRUT and set a payout rate (never below 5%; confirm your remainder meets the 10% present‑value test using the Section 7520 rate).
  4. Select trustees and name charitable remainder beneficiaries carefully (use 170(b)(1)(A) organizations for best outcomes).
  5. Plan for UBTI exposure and debt financing consequences.
  6. Coordinate estate‑tax, gift‑tax, and income‑tax modeling with counsel and CPA.

For comparisons with other giving vehicles, see our guide “Charitable Remainder Trusts vs Donor‑Advised Funds: Choosing the Right Vehicle” and related planning ideas in “Charitable Giving Strategies for Maximum Tax Efficiency.”

Frequently asked technical questions

  • Can you revoke a CRT? No — a CRT is generally irrevocable. Consider alternatives if you need flexibility.
  • How long can a CRT last? Income can be paid for up to 20 years or for the life/lives of beneficiaries.
  • Does a CRT pay capital gains tax when it sells an appreciated asset? Generally no — CRTs are tax‑exempt for ordinary income and capital gains, but UBTI exceptions exist. The tax impact is allocated to beneficiaries upon distribution under IRS ordering rules.

(Reference: IRS Charitable Remainder Trusts page: https://www.irs.gov/charities-non-profits/charitable-remainder-trusts)

Professional tips I use in practice

  • Model multiple scenarios with a range of Section 7520 rates. Small changes in the 7520 rate materially affect the donor’s charitable deduction and the permissible payout.
  • Consider a net-income or net-income-with-make-up CRUT when cash flow volatility exists; these variants help the trust manage years with poor investment returns.
  • Use a corporate trustee when holding complex or illiquid assets to reduce administrative risk and help satisfy fiduciary duties.

Final notes and disclaimer

Charitable Remainder Trusts are powerful but complex. They combine tax, trust, and charitable law; mistakes can be costly. This article is educational only and does not replace tailored legal, tax, or financial advice. Consult an estate‑planning attorney and a tax professional before creating a CRT.

Authoritative sources: IRS — Charitable Remainder Trusts (IRC §664) https://www.irs.gov/charities-non-profits/charitable-remainder-trusts; Form 5227 information https://www.irs.gov/forms-pubs/about-form-5227.

If you’re comparing charitable gift vehicles, start with the linked FinHelp guides above and schedule a planning session with your advisor to model CRT versus other options.